Amid declining oil prices, there are spots of value in the energy sector and investors are gradually increasing their stake in these value investment opportunities. The latest example being Patterson-UTI Energy (PTEN, Financial) where Kahn Brothers (Trades, Portfolio) increased their stake by nearly 4.1% and currently hold 1,019,891 shares of the company. While investors can track real time buying and selling activity by Gurus in Guru Focus Real Time Picks, I will be focusing on the positives in the onshore drilling sector and the positives related to Patterson-UTI Energy.
The North American rig count data is one of the major reasons to be cautiously bullish on the onshore drilling sector. After making a high in September 2014, onshore rig count in North America was on a steep decline until the end of May 2015. This decline in rig count translated into challenging times for onshore drilling service providers. However, on May 29, 2015, the onshore rig count was 875 and as of July 31, 2015, the rig count was 874. This is a clear indication that onshore rig count has stabilized in the last two months and this industry data is certainly positive news for onshore drillers.
With companies having done with their capital expenditure reduction and suspension of rigs, investors can consider exposure to onshore rig service providers. However, the accumulation needs to be gradual as oil prices remain depressed and another round of capital expenditure cuts by oil and gas companies can’t be ruled out.
Coming to the factors that make Patterson-UTI Energy attractive, the company’s fleet transformation in the recent years makes the stock attractive among onshore drilling service providers. To put things into perspective, Patterson-UTI Energy had a majority of mechanical rigs as of December 2009. However, by December 2015, the company’s rig composition will be largely APEX rigs with a total of 161 APEX rigs in the fleet (70% of total fleet). With vertical drilling on a decline and horizontal drilling dominant in North America, the company’s APEX rigs will witness strong demand as the industry recovers.
It is also important to mention here that the company’s APEX walking rigs have multi-directional walking capability with walking time averaging 45 minutes for 10-15 well spacing. With most of the new rigs having walking systems in addition to the fact that the rigs are pad drilling capable, the demand for the company’s rigs is likely to be strong. It is important to mention here that pad drilling contributes to rig efficiency and oil & gas will be looking for pad drilling capable rigs in challenging times.
Besides the factor of stabilizing industry outlook and quality rigs, I also consider Patterson-UTI Energy as a good investment option for its strong financial flexibility. As of March 2015, the company had $87 million in cash and $500 million in undrawn credit facility. A strong liquidity position ensures that no further financing is required in the foreseeable future for capital investments.
However, the company’s debt position does give Patterson-UTI Energy high financial flexibility to leverage if there is a strong industry turnaround few years down the line. As of March 2015, the company’s net debt to capitalization was just 21.5% with debt maturity on or after September 2017.
This point of financial flexibility also ensures that Patterson-UTI Energy can utilize operating cash flows for dividends and share repurchase. The company’s current dividend of $0.4 per share is therefore sustainable with $187 million still remaining under authorized share repurchase program. In other words, there a multiple avenues for shareholder value creation and Patterson-UTI Energy has been doing well on these fronts.
With these positives, I want to mention here that for the quarter ended March 2015, Patterson-UTI Energy had an average of 165 drilling rigs operating in the United States and eight rigs in Canada. However, for the quarter ended June 2015, the Company had an average of 122 drilling rigs operating in the United States and two rigs in Canada. However, this factor has been discounted in the stock price with the release of second quarter results on July 23, 2015.
With rig count stabilizing, I see Patterson-UTI Energy stock also stabilizing. In the recent past, renewed oil price decline has also resulted in some negative sentiments for the stock. I believe that the Iran oil supply factor is now discounted in oil prices and Brent might not witness further downside. Therefore, this is a good opportunity for long-term investors to consider some exposure to Patterson-UTI Energy.
